Cryptocurrencies: From Speculative Hype to Financial Control Tool - Expert

Investors are becoming frustrated with the idea of decentralised digital money, and against the recent backdrop, countries are increasingly interested in using blockchain technology to translate national currencies into digits and gain unprecedented control over the financial system.

In 2018, the capitalisation of the cryptocurrency market, including the most famous digital currency, Bitcoin, dropped almost 80%. 

When the creator of Bitcoin, under the alias Satoshi Nakamoto, wrote his "White Paper", he could hardly have expected that his creation would become many times more expensive than gold. At first, Bitcoins were mainly mined and exchanged by programmers who are fond of cryptography. Bitcoin was perceived more as something fun than a currency or asset of great value.

Although the truth is that the idea of a decentralised currency, the emission, and processing of which is based on blockchain technology, eventually appealed to many financial speculators. After all, there is no single regulator, which means that the supply of currency and its value depend solely on market sentiment, which, if desired, can be easily influenced. That is why the Bitcoin exchange rate, as well as that of many other cryptocurrencies, soared twentyfold over a year. If at the end of 2016 the Bitcoin rate was about 1,000 dollars, then in December 2017, right before the launch of the world's first Bitcoin futures, for one cryptocoin people were ready to give 20,000 dollars.

An entire industry of miners has grown, namely those who directly process Bitcoin and other cryptocurrencies. China has practically become a monopolist on the market, probably because of its good industrial base for the production of mining equipment, as well as low-cost electricity, which is needed a lot for the extraction and processing of cryptocurrency. China accounts for more than 70% of the world's production of Bitcoin. Moreover, the country has turned out to be the manufacturer of the most advanced mining technology: Bitmain's ASIC Bitcoin Miners occupy three-quarters of the world market.

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However, when the industry reached such an impressive scale, the Chinese authorities became worried. First, they understood that the price of cryptocurrency is a rather conditional thing, depending on speculative sentiments. At the same time, the mining market, which has grown in China, has accumulated hundreds of millions of real dollars, which can easily be lost in the event of volatility. Not to mention the fact that it was no longer speculators who started investing in cryptocurrencies, but ordinary citizens.

There are quite a few stories in the Chinese media about how people sold apartments to invest in Bitcoins, pledged money intended for studies, even grandmothers tried to convert meagre pension savings into cryptocurrency. This could, in the end, turn into serious social upheavals. And that is when China introduced a comprehensive ban on the circulation of cryptocurrencies in the country, including the numerous cryptocurrency exchanges and the primary placement of ICO coins. In January of the outgoing year, the Internet Finance Risk Management Steering Group of the Central Bank of China issued a provision for miners who were supposed to gradually phase out their activities, said Zhang Ning, an expert at the Institute of Financial and Economic Strategy of the Chinese Academy of Social Sciences (CASS) of the People's Republic of China, in an interview with Sputnik.

"Chinese authorities are going to take quite tough measures. First, in order to ensure a normal and uninterrupted supply of electricity to the population and industry, it is necessary to limit the consumption of electricity by miners. Secondly, cryptocurrencies, and Bitcoin in particular, threaten the state's monopoly on the issue of money. Moreover, in the last two or three years, the country's authorities have been pursuing a policy of controlling the outflow of capital in order to maintain the stability of the yuan. And the cryptocurrency negates the efforts of the regulators: capital is withdrawn from the country with the help of it, including criminal money. It became that way to bypass financial control".

In 2018, the rate of Bitcoin and other cryptocurrencies began to fall. Analysts frequently attributed this to the bans of the Chinese authorities. For example, when a player occupying two-thirds of the market leaves, it naturally puts pressure on the whole sphere. Of course, restrictive measures could have an impact. But they can be circumvented. Cryptocurrency exchanges began to massively move to other jurisdictions: Japan, Singapore, South Korea, and Hong Kong. Those participants of the cryptocurrency market who could not register with the new exchanges on time carried out P2P transactions through popular instant messengers. Finally, miners began to find other locations with cheap electricity and a cold climate, favourable for powerful computers in need of constant cooling — in Russia's Transbaikalia, Siberia or in Canada.

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Far more often investors have been scared away by frequent failures on cryptocurrency exchanges. One time they were subjected to hacker attacks, with the data of participants being leaked to third parties. The other time, cryptocurrency wallets were cracked. Lastly, the suspension of the operations of exchanges themselves brought considerable losses. The most serious incident occurred last fall on the Chinese stock exchange OKEx, where Bitcoin futures are traded. During the sharp fall in the price of Bitcoin, the exchange suddenly "crashed" — the participants were "thrown out" from personal accounts and they could not perform any operations.

However, as the rate was falling down, margin calls were being executed. Thus, the positions of many investors were forcibly closed and they had no opportunity to influence the process. A huge number of people lost their only savings. Outraged investors almost stormed the company's office, so OKEx founder Xu Xing even had to hide at a police station.

Finally, the lack of consensus within the community of miners and developers does not inspire investors. "Forks", or Bitcoin divisions, have happened more than once. A branch later developed from the original Bitcoin — Bitcoin Cash. Then even this branch split. It can't be said that it was specifically one of these factors that had the decisive impact on the Bitcoin rate. Most likely a combination of all these factors pushed the cryptocurrency market down.

Bitcoin will enter the New Year with only 20% of its value compared with the same period a year earlier. The hype has passed and now only professional players remain. Against this backdrop, countries are increasingly interested in using blockchain to translate national currencies into digits and gain unprecedented control over the financial system. Venezuela has attempted to improve the economy of the national cryptocurrency, El Petro, which is backed by oil assets.

On 21 March, the digital currency's initial coin offering (ICO) started in Venezuela. Initially, it was assumed that the cost of El Petro would be equivalent to one barrel of Venezuelan oil. The authorities had hoped that the cryptocurrency would help stabilize the bolivar soberano. They even began to nominate pensions and social benefits of citizens in cryptocurrency and offered other countries to pay in El Petro for oil. But later it turned out that the price of the cryptocurrency was determined by President Nicolas Maduro. The price of El Petro has grown manifold over the year. Because of this, the bolivar has devalued even more and there is no talk of economic stabilisation.

China has also announced plans to launch its own national cryptocurrency. The vice-governor of the People's Bank of China, Fan Yifei, noted that, at first, the digital yuan would replace only the monetary aggregate M0 (cash in circulation). The use of cryptocurrency in investment activities will be prohibited. The introduction of digital currency and blockchain will allow Chinese authorities to significantly reduce the volume of the shadow economy. Based on the statements of the vice-governor of the China Central Bank, it follows that transactions should not be anonymous.

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Thus, the crypto-yuan will increase the transparency of transactions ("black" bookkeeping will no longer be possible). Secondly, the cost of maintaining a digital currency system is much lower for the regulator than the cost of issuing and disposing of paper money. And thirdly, using cryptocurrency, it would be possible to make cross-border money transfers much faster and cheaper.

So far, these are only plans for the future. Nevertheless, a paradoxical trend can already be traced. Blockchain-based cryptocurrency was conceived by the libertarians as a response to the 2008 global financial crisis, for which, they thought, the central banks of leading countries and the world's largest financial corporations were to blame. The idea was simple: to invent money where no one would have a monopoly and which would only be regulated by the free market. Now the practice seems to show that without a regulator, very frequently chaos arises. What is even more surprising, it turns out, is that the libertarian blockchain is perfect for absolute financial control.

The views and opinions expressed by the speaker do not necessarily reflect those of Sputnik.